Convertible Note: Conversions

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Explanations of conversion, automatic conversion and conversion discount as it applies to convertible notes.

Convertible Note Continued:
Here are questions to consider in your convertible note variables regarding:

Conversion and Automatic Conversion

Will there be a mandatory conversion at a set price? How is price determined?

Typically conversion of the note into equity takes place at the “Next Equity Event.”

Tip:  Try to ensure that all Note holders have the same conversion terms and that any amendments are done on a majority of class basis, to avoid "outlier" investors from disrupting future events.

In some Notes, there is a minimum amount or threshold to be raised in a subsequent financing that will trigger the automatic conversion, for example, an equity event that is greater than $1 million being raised.

Conversion Discount:

What discount will you offer to make this attractive to investors?

Investors need incentive to make an early investment. A discount is the most common incentive to provide a prospective Note holder. The discount lowers the per share price that the investor will pay when the next financing occurs.

For example, a 20% discount would allow the Note holder to buy shares at 20% less than the new investors in the subsequent financing.  If the new investors negotiate a $1/share, a Note holder would purchase the shares at $.80/share. Sometimes the discount percent increases over time.

Tip: Consider a sliding scale based on time.

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